Victims of Madoff fraud can't sue SEC: appeals court

Wed Apr 10, 2013 2:08pm EDT
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By Nate Raymond

NEW YORK (Reuters) - Victims of Bernard Madoff's investment fraud have lost their bid to sue the Securities and Exchange Commission for negligence in failing to uncover the swindler's Ponzi scheme.

On Wednesday, a federal appeals court in New York upheld the dismissal of lawsuits against the securities regulator brought by Madoff investors. The court said the SEC's actions and "regrettable inaction" were protected by a law that shields federal agencies from liability.

The Madoff case embarrassed the SEC, which had investigated the now-imprisoned money manager but failed to detect his fraud.

The investor lawsuits relied heavily on a 2009 report by the SEC Inspector General's office, which outlined how the agency missed red flags and failed to follow up properly on leads that he was running a massive scam at his firm, Bernard L. Madoff Investment Securities LLC.

Howard Kleinhendler, a lawyer for eight plaintiffs who lost $50 million in Madoff's scheme, said he could not envision a better example of a case in which the SEC should be held liable for failing to prevent a fraud.

"It just shows that we spend a lot of money on this agency, and when they screw up, they're not accountable," he said, adding he would seek a Supreme Court review of the case.

An SEC spokesman did not immediately respond to a request for comment.

In an unsigned opinion, a three-judge panel of the 2nd U.S. Circuit Court of Appeals expressed "sympathy for Plaintiffs' predicament (and our antipathy for the SEC's conduct)," but said Congress' intent was to protect regulators' discretionary use of their investigatory powers.   Continued...